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Learn How to Read Candlestick Patterns Like a Pro

March 15, 2021 by Daniels Trading| Futures 101

In contemporary technical analysis, candlestick patterns are go-to indicators for legions of active traders. From the doji to the evening star, these formations are applied to every conceivable market. That is one of the key benefits of using Japanese candlestick chart patterns: The formations are readily discernible.

Regardless of market or time frame, candlestick charts present price behavior in a unique context. In this blog post, we’ll give you a few tips on how to read candlestick patterns like a seasoned pro.

The Doji

A doji is a single candlestick pattern with an opening value equal or near equal to its close. Dojis are visually similar to a cross or a plus symbol (+), and they signify indecisive market conditions.

Generally, a doji is viewed as being a precursor to a market reversal or breakout. There are four distinct kinds of dojis:

  • Normal: The classic doji features a compressed periodic range with a centralized open and close. In many cases, the normal doji forms within the previous candle’s range.
  • Long-legged: A long-legged doji has an extended periodic range with an elongated upper and lower tail. The opening and closing values are located near the center of the range. Typically, one tail of the long-legged doji extends outside of the previous candlestick’s extremes.
  • Dragonfly: The dragonfly doji features an elongated lower tail with the open and close very near the high. The dragonfly suggests that a bearish trend or bullish pullback may be reversing.
  • Gravestone: The gravestone doji exhibits an elongated upper tail with an open and close very near the low. Gravestones suggest that a bullish trend or bearish pullback may be reversing.

In addition to being standalone formations, dojis may be included in multiple-candle patterns. For anyone getting started with Japanese candlesticks, recognizing and understanding the doji is an essential first step.
Want technical trading tips? Download our free guide 12+ Candlestick Formations Every Technical Trader Should Know today!

Advanced Candlestick Patterns

One of the great things about candlesticks is that they readily convey a large amount of information. Every candle discloses an open, close, high, low, body, and market direction. This user-friendly interface allows for advanced interpretations of price action itself.

By far, the doji is one of the simplest candlestick patterns. Here are a few popular formations that feature greater complexity:

Bullish/Bearish Engulfing Patterns

Bullish and bearish engulfing patterns are two-candlestick formations used to signal market direction. The bullish engulfing pattern occurs when a bearish candle (close lower than the open) is encapsulated by a second bullish candle (close higher than the open).

Conversely, a bearish engulfing pattern occurs when a bullish candlestick is encapsulated by a bearish candlestick. Accordingly, the forthcoming market direction is projected to be a continuation of the second candlestick in the sequence. If bullish, buying in just above the second candle is warranted; if bearish, selling directly below the second candlestick is plausible. To manage risk, a trader can place stop losses above or below the first candlestick.

Morning/Evening Stars

Morning and evening stars are three-candle formations thought to signify possible market reversals. The morning star is used to spot a bear market reversal, so it occurs within an established downtrend. The first candle is bearish; the second candle opens gap down and has a compressed range; the third candle is large and bullish and opens gap up.

By contrast, the evening star is the exact opposite of the morning star, signaling a bullish trend reversal. On special occasions, the second candle of the morning/evening star is a doji―this makes the formation an exceedingly rare and powerful reversal indicator. For morning stars, a buy is recommended above the first candle with a stop loss below the second; for evening stars, a sell below the first candle and stop loss above the second is appropriate.

Trading strategies based on candlestick patterns such as these provide traders several key advantages. First and foremost, the pattern defines specific market entry and exit price points. Regardless of whether the pattern is effective or ineffective, the formation identifies an exact stop loss location. This ensures that losing trades are cut off quickly while winning trades are allowed to run.

Interested in Becoming a Pattern Trader?

Although no strategy is a 100 percent winner, countless technical traders depend on candlestick patterns to identify when, what, and how to trade. To learn more, check out Daniels Trading’s online guide 12+ Candlestick Formations Every Technical Trader Should Know. In it, you’ll find great tips on how to read charts, interpret pricing data, and execute positive expectation trades.
Ready to think like a technical trader? Download our free guide to learn how to identify chart formations and take action when the time is right.

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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